What Are Some Common Reasons For Director Disqualifications And The Remedies Available To A Director?

business director disqualification

The company director heads the management, formation, and promotion-related decisions and is also involved in all the critical transactions of the company. Therefore, the performance of the company is largely dependent upon the competence and efficiency of the directors. And suppose the director underperforms or breaches his legal obligations. In that case, he will be liable for disqualification for a period ranging from two to fifteen years, depending upon the nature and gravity of the offense. 

The disqualification proceedings are a matter of public order, and they are thoroughly published. Therefore, the career of the disqualified director is adversely affected, and his authority is boiled down to a mere employee. However, the disqualification can be challenged, and there are remedies available to a concerned director. Here is an article on some common grounds for director disqualification and the remedies available to a director. 

Director’s Bankruptcy 

The Director’s reputation is crucial to encourage investors to put their money into the company. This improves capital and net worth and the company and allows it to work efficiently and smoothly. Therefore, if a director’s reputation is ruined, it is harmful to the company’s operations. 

A bankrupt director denotes that he is bad at fund management and is likely to use the company’s assets for personal use. This drives the investors to pull their money out. Therefore, when a director declares bankruptcy, he is automatically disqualified. Rules for automatic disqualification are given in Company Director Disqualification Act, 1986. It states that if a bankrupt director continues in his office, he might be charged with a criminal offense. 

Company Becomes Insolvent 

The company has to take loans and debts from the market and shareholders to continue its operations. Sometimes, due to an adverse production environment or a bad fiscal year, the company falls short of capital. It then approaches banks and stakeholders and issues them debt bonds. However, these debts are time-barred, and they must be repaid in the promised time. This requires the company to perform well in the coming fiscal years, which depends on the director’s efficiency. 

If a director is not qualified enough, the company may perform poorly consistently, which is detrimental to the shareholders’ and stakeholders’ interests. Therefore, when a company is declared insolvent and the liquidation process starts, the director is removed and is charged with disqualification. 

However, insolvency is not an absolute ground for disqualification, and the director’s conduct and decisions are thoroughly investigated. Also, the burden of proof to prove that the director did not work in the company’s best interest lies with the secretary of state. Most of the charged directors evade the disqualification process. 

What Are The Remedies Available? 

The director disqualification proceedings are not the end of the world, and if you are charged with one, just stay calm and explore your available legal options. Discussed below are some of the general remedies available: 

Defend Your Case Before The Court: Appear for your proceedings and prepare your case well. The court will see if you were competent enough to hold such a key position and if your conduct was well within the legal limits. 

The court will also look at the mitigating factors, such as if the company’s poor performance irrespective of the director’s diligence and wise decisions. The assets and cash position of the company will also be thoroughly assessed to see if it was going through a rough patch. 

Provide Disqualification Undertaking: The undertaking signifies that you have voluntarily disqualified yourself from the director’s position. This will help you save the litigation cost incurred by the secretary of state. Although, always consult a professional corporate lawyer before providing your undertaking.

Bootstrap Business Blog Newest Posts From Mike Schiemer, Partners, And News Outlets